As recommended by Coding The Markets, I ordered Larry Harris’s Trading and Exchanges; and as recommended by Martin Geddes, I ordered Adam Seligman’s The Problem of Trust.
I’ve now received both books, and I’m working my way through them. Thanks again to both.
A few quick observations:
1. When I looked at Harris’s definitions of trustworthiness and creditworthiness, I was more intrigued by the sentences that followed the definitions than by the definitions themselves. I quote:
People are trustworthy if they try to do what they say they will do. People are creditworthy if they can do what they say they will do.
[So far so good, but here comes a snowball designed for me].
Since people often will not or cannot do what they promise, market institutions must be designed to effectively and inexpensively enforce contracts.
End of quote.
Wow.
Before commenting, I’d like to recount a tangential tale from Seligman’s book. In his conclusions, as an aside Seligman discusses his changing behaviour with respect to smoking. When it was legal for him to smoke anywhere, he was always courteous and asked people around him whether they minded. Once someone else (e.g. “the state”) decided where he could smoke and where he couldn’t, his behaviour changed. Now he no longer asked for permission. If he was legally entitled to smoke somewhere he did.
I think the two stories are linked, and are all about covenant-versus-contract behaviour. In a covenant, when you hit a problem, you try and fix it. In a contract, when the same thing happens, you look for recourse. Someone to blame. Someone to sue. Someone to pay. Anyone. But not you.
And in a weird kind of way it’s linked to all the stuff we learnt about Quality First. If you remove responsibility and accountability from an actor, then you do not get quality. Instead you get output that is explicitly designed to keep the relevant  Inspection Department fully occupied. Why complain? Surely that’s the reason you set the department up in the first place. Inspectors inspect. That’s what they do.
As a complete aside I am reminded of the work done by Erik Brynjolfsson et al on Incomplete Contracts, some of which you can read here. I quote from Erik’s paper:
….unlike the contracts typically analyzed by agency theory, real world contracts are almost always “incomplete”, in the sense that there are inevitably some circumstances or contingencies that are left out of the contract, because they were either unforeseen or simply too expensive to enumerate in sufficient detail.
Random walk over. What am I trying to say?Â
Larry Harris seems to be saying that people often don’t do what they say they will do, and that market structures have to take this into account. In fact he goes further and says “Attempts to solve trustworthiness and creditworthiness problems explain much of the structure of market institutions.” And he sees contract enforceability as the way to solve it.
Adam Seligman seems to be saying that people behave differently when they no longer need to negotiate bilateral or multilateral agreements on what is mutually acceptable, especially driven by nanny- behaviour, be it state or regulator or firm. Here the enforceability of the contract (“I can smoke here but not there”) creates undesired outcomes.
Erik Brynjolfsson seems to be saying that real world contracts are incomplete anyway.
Which leaves me thinking. Just what is it we are trying to do with trust? Why are we mixing it up with contract when it is patently not contract? It seems strange to design for failure in a market, talking about trusting people but expecting them to fail; it seems strange to talk about using contracts to enforce what happens in failure when most contracts are incomplete and probably expensive to enforce; it seems strange to empower people by increasing inspection that reduces their accountability.
The costs of this set-up-to-fail design couldn’t be low. It’s a bit like planning for pilferage in supermarkets, something else that makes less than perfect sense to me. There seems to be a lot of scope to revisit what we think about trust. I will continue to read Harris and Seligman and continue to have conversations with people, because it looks as if there may be scope to think differently. I remain grateful for the pointers, so please keep them coming.
An aside. Opensource communities work on the all-bugs-are-shallow-to-many eyes principle. How come this improves quality rather than decreases it? Two reasons. One, there is no implied de-skilling of the knowledge worker, in fact peer recognition issues have the opposite effect, people want to exhibit quality work. Two, the inspectors are not a class apart, but themselves developers. Development and inspection are interchangeable roles, interchangeable within the day.
If you design for inspectors to find faults you will have faults. If you design for Post Closing Adjustments to financial figures you will have Post Closing Adjustments. If you design for Second Chances at auctions you will have Second Chances. If you design for market participants to fail then some will fail.
Alternatively you could have covenant, and the occasional ruptured bench. I must check just how many benches the merchants of Lombardy broke.
Just a thought. More later.